Besides Beijing’s Bluster, It’s Business as Usual

In response to the increasing American military presence on Australian soil, the editorial in the Chinese state-run Global Times newspaper warned that Australia “cannot play China for a fool” and cautioned Canberra that Australia needs to “prevent things from growing out of control.” Chinese civilian and military officials have consistently referred to the ANZUS alliance as a ‘cold war relic’ that has no place in an Asia largely defined by China’s ‘peaceful rise’. One conclusion is that we have gone out of our way to insult our largest trading partner. Another is that this could put our economic interests in jeopardy. In fact, both these conclusions are incorrect.

Let’s begin with one throwaway comment about some of the angry responses emanating out of China. Beijing consistently insists that it does not view Washington as a strategic competitor, and any contrary suggestion is mischievously designed to fuel the ‘China threat’ thesis throughout the region. If China really believed that America was not its strategic competitor, then an announcement to base a few hundred troops in Darwin should not raise Beijing’s ire.

Diplomatic silliness aside, Australia is facing some difficult questions. For the first time in our history, our largest trading partner is no longer a member of the Western alliance. If we add into the mix that our largest trading partner is already engaged in a deepening strategic competition with our primary security ally, then we are facing an apparent and unprecedented divergence in our economic and security interests.

It is noteworthy that Australia is not alone in this dilemma. China has emerged as the largest trading partner of Japan, South Korea, Vietnam and Singapore in addition to Australia’s. It is the largest trading partner for America and India in Asia.

In a diverse region, one might expect these countries to move in many different strategic directions. Yet, to China’s dismay, every major country in Asia are all hedging harder against China’s rise by moving closer to America and each other strategically. The extent of strategic cooperation and military intimacy with America and each other is variable. But the direction to hedge against China through a renewed American presence (and bulking up military capabilities) is uniform and unmistakable. If Australia is indeed ‘rocking the boat’ and ‘provoking’ China by welcoming a greater American presence on Australian soil and in the region, then we are doing so in unison with every significant capital in Asia excluding Beijing. Canberra can hardly be criticized for being an outlier in the region.

The important question at this time is whether China can do anything about it. After all, it is Asia’s largest and most important trading economy in Asia. Such large economic powers tend to exert a strategic pull, or else pressure, on regional states to move closer to its sphere of influence. In Australia’s case, almost twenty-two cents in every dollar of exports is to China.

In business terms, China is our biggest client. Yet, recent history suggests that China’s capacity to punish Australia, let alone, exercise decisive leverage over our strategic direction is surprisingly limited. From 2009 onwards, Australia’s diplomatic relationship with China reached a generational low over issues such as the May 2009 Defence White Paper which explicitly considered China’s rise as potentially disruptive in the region, fallout over the detention and arrest of Rio Tinto executive Stern Hu in July 2009, and Beijing’s displeasure at the granting of a visa to exiled Uighur leader Rebiya Kadeer one month later. Despite the diplomatic friction, commodities and other exports to China continued to accelerate over the next eighteen months.

This reinforces the reality that cheap and reliable access to resources is considered by the Chinese Communist Party to be in China’s core national interest because these resources are needed to sustain the country’s fixed-investment which drives around half of its GDP growth. As the CCP openly admits, such growth is essential to the Party remaining in control and in power, and therefore goes to the heart of Chinese regime security.

Currently, three companies—BHP Billiton, Rio Tinto and Vale—supply 70-80 percent of global iron-ore exports. Over the past ten years, Australian iron-ore has been on average US$12 per tonne cheaper than from Brazil due to geographical proximity and subsequent lower shipping costs.

For the moment, only 10 percent of imported iron-ore into China is owned by Chinese state-owned-enterprises. Despite substantial SOE investment in iron-ore fields in places such as Africa, these mines are still at least a decade away from achieving substantial output. Even if we assume the best case scenario for Chinese SOE miners of 250 million tonnes per year in 2020, this constitutes only one-fifth of the country’s estimated needs. The upshot is that Beijing will continue to buy Australian iron-ore in growing quantities because it needs to, regardless of whether it likes Australian strategic policy. More broadly, Beijing’s capacity to reward strategic friends, and punish strategic competitors is overstated.

The CCP cannot afford any foreign policy or economic disasters since the stability of the regime would be threatened. In encouraging China’s self-proclaimed peaceful rise, raising the cost of Chinese overreach, rather than lowering them, seems the better way to proceed.